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McAvoy v. Hilbert

March 24, 2009


Appeal from an order of the Superior Court of San Diego, Jeffrey B. Barton, Judge. Affirmed. (San Diego County Super. Ct. No. GIC878347)

The opinion of the court was delivered by: Nares, J.


In this action arising out of the sale of a woodworking business owned by Randall K. McAvoy and Trudy K. Esther McAvoy (together, the McAvoys), together with the real property upon which the business operated, Dail W. Hilbert, the broker on the transaction, appeals from an order denying his petition to compel arbitration. The court denied the petition on the basis that (1) the arbitration clause in Hilbert's open listing agreement with the McAvoys failed to meet the statutory disclosure requirements of Code of Civil Procedure*fn1 section 1298; and (2) there was a strong possibility of conflicting rulings with regard to the nonarbitral portions of the action, and therefore the court, acting in its discretion under section 1281.2, elected to not enforce the arbitration clause.

On appeal, Hilbert asserts the court erred in denying his petition to compel arbitration arguing (1) section 1298 does not apply to an open listing agreement for the sale of a business, as it was not a "real property sales transaction[]"; and (2) there was no possibility of inconsistent rulings so as to justify denying enforcement of the agreement to arbitrate.

We conclude the open listing agreement in this matter is a "real property sales transaction" subject to the statutory disclosure requirements of section 1298 because it is a listing agreement between a principal and agent for the sale of real property that is part of a larger transaction for the sale of a business. Therefore the court did not err in denying Hilbert's motion to compel arbitration, and we affirm the court's order on that basis. Accordingly, we need not determine if the court erred denying the petition to compel arbitration by also finding there was a possibility of inconsistent rulings.


The McAvoys, in their capacity as trustees of a family trust, owned a commercial building (the property) that housed their woodworking business (the business) and four tenants. The McAvoys sold the property and business to Charles Hughes, who formed two entities - Charvania Investments, LLC (Charvania) and Willster Construction, Inc. (Willster) - for the transaction. In June 2004 Charvania bought the property for $2.7 million, and Willster bought the business for $750,000.

Hilbert, a licensed real estate agent, was the broker on the sale. As part of the transaction, the McAvoys executed an open listing agreement with Hilbert. The agreement specified it was for the sale of "McAvoy Construction, Inc.," and specified the square footage of the building that housed the business, as well as the base monthly rental for the tenants occupying the premises. The listed purchase price for the business was $750,000. The agreement also stated that as part of the transaction there was "Real estate available and Seller agrees to pay Broker a commission of Four percent (4%) of the purchase/lease amount." The open listing agreement stated that the McAvoys had engaged Hilbert "to dispose of the above described business assets." The open listing agreement contained an arbitration clause that provides:

"Any dispute relating to this Agreement shall be decided by binding arbitration as provided by the California Code of Civil Procedure, beginning at section 1280, and shall include full rights of discovery."

Hilbert prepared the purchase agreement on the sale to Charvania and Willster, which included both the business and the real estate, and disclosed that Hilbert was acting as a broker for both the seller and buyers. The escrow instructions for the transaction also disclosed Hilbert was acting as the broker for both the buyers and seller. It also showed Hilbert was to receive a commission in the amount of $198,000, representing 12 percent of the purchase price for the business, and 4 percent of the sale price of the real estate.

The McAvoys carried back a promissory note of $1 million on the real estate and $150,000 on the business. Both were secured by the real property and were prepared by Hilbert. The Charvania note contained a prepayment penalty and both notes contained provisions for late fees.

Hughes was unsuccessful in the business and fell behind on payments to the McAvoys. The McAvoys recorded a notice of default, and Hughes listed the property for sale. Sidney and Judith Levine (the Levines) agreed to buy the property and entered into a lease with Willster based on Hughes's purported verbal representation that Charvania would use the sale proceeds to infuse capital into Willster. Escrow closed in June 2006, paying all secured liens, including the McAvoys' notes.

After the close of escrow, Willster shut its doors and, along with Hughes, filed for bankruptcy. The Levines were left with an abandoned building but still were required to make payments on the loan they obtained to finance the purchase.

In 2007 the Levines, in their capacity as co-trustees of their family trust, filed suit against various parties, including the McAvoys, against whom they asserted causes of action under the California Uniform Fraudulent Transfer Act, Civil Code ยง 3439 et seq. (the UFTA). They alleged the Levines were creditors of Willster and Charvania and that the payments they made to the McAvoys should be set aside as they were "not supported by receipt of 'reasonably equivalent value.'" Their damages were stated as "the difference between the $750,000 which Willster paid for the [business], and the Actual value of the [business] at the time of the 2004 transaction." They also alleged they were entitled to set aside prepayment penalties in the amount of ...

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